If you are married and file a joint tax return, your federal tax rate may be lower than that of an unmarried individual. In fact, many areas of U.S. tax law are written to provide married couples with greater benefits than those received by other individuals - the same is true for retirement plans, which offer several perks for those who have tied the knot. In this article, we highlight some of the unique benefits available to married couples.
Using Your Spouse's Income To Fund Your IRA
One of the eligibility requirements for making a contribution to an IRA is that you must have taxable compensation. However, an exception is made for a married individual who files a joint tax return if his or her spouse has taxable compensation. For this purpose, the spouse who has taxable compensation is allowed to make a spousal IRA contribution to the IRA of the spouse who has no taxable compensation, commonly known as the non-working spouse.
SEE: Making Spousal IRA Contributions.
Inheriting Your Spouse's Retirement Benefits
A retirement account owner can generally designate any party as the beneficiary of his or her retirement account. However, in certain cases, if the account owner is married, his or her spouse must consent to the designation if the spouse is not the sole primary beneficiary of the retirement account. This ensures that your spouse does not designate someone else to receive death benefits from his or her retirement accounts without your approval. Such spousal protection is offered for the following types of retirement accounts:
If your spouse has assets in a qualified plan account, he or she is required to designate you as the sole primary beneficiary. Plan administrators will generally not accept beneficiary designations unless the spouse is the sole primary beneficiary or consents to an alternate designation, and the consent must be witnessed by a notary public or a plan representative.
IRAs for Residents of Community/Marital PropertyStates
If an IRA owner lives in a community or marital property state, spousal consent is generally required if the IRA owner designates any party other than his or her spouse as the primary beneficiary of the IRA. Community property states are Alaska (residents may elect to have their property treated as such), Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas and Washington; Wisconsin is the only marital property state.
Prevention of Distributions without Spousal Consent
Quite often, retirement plan participants deplete their retirement assets without the knowledge of their spouses. This can be a devastating revelation to a spouse who was counting on those funds to finance the couple's retirement years. If the assets are in a defined-benefit, target-benefit or money-purchase pension plan, depletion of those assets is unlikely to occur without the spouse's knowledge, because they are generally required to be distributed in the form of a qualified joint and survivor annuity (QJSA), unless the participant and the spouse consent in writing to receive distributions in another form.
Exceptions apply to assets that are required to be distributed from the plan, including excess contributions, required minimum distributions and amounts that can be cashed out without the participant's consent. In most cases, amounts can be cashed out without the participant's consent if his or her accrued balance under the plan is $5,000 or less.
While the QJSA rules always apply to all defined-benefit, target-benefit and money-purchase pension plans, this is not the case for profit-sharing and 401(k) plans. Instead, the QJSA rules apply to these plans only if the plan is designed to include those options. Some profit-sharing and 401(k) plan documents, such as prototypes, are designed to allow employers to elect whether they want the plan to be subject to the QJSA rules.
Treating Inherited Assets as Your Own
If you inherit retirement plan assets, your options for distributing the assets are generally as follows:
If the retirement account owner dies before the required beginning date (RBD):
If the retirement account owner dies before the RBD:
Most of the benefits discussed in this article are meant to protect spouses, including those who do not have regular jobs but provide other forms of family support while the other spouse works at an income-producing job. If you are unemployed and want to fund your IRA, consider using your spouse's income as your taxable compensation. Also, if you are a qualified plan participant or an IRA owner, check with your plan administrator to determine whether you need to obtain the consent of your spouse for distributions and loans. Also check with your IRA custodian to determine whether you need your spouse's consent if you decide to designate someone else as the primary beneficiary of your IRA.